Deloitte in the News
The lawyers’ insight on Law No.466: tax audits and appeal procedure
Tax reform and the new concept of guilt
In the mid of 2020, Law 466-ІХ has implemented another tax reform in Ukraine. The reform is largely aimed at implementing certain BEPS steps in Ukraine. However, any tax reform, regardless of its goals, usually comes down to collecting more taxes and optimizing the tax collection procedure (collection of taxes from new entities, sources of income, new transactions, etc.). For this purpose, the new rules, mechanisms and institutions of law are being introduced.
As an example, let’s look at the concept of guilt that was introduced in the tax law of Ukraine for the first time. Previously, the very fact of committing an offense was considered a sufficient ground for liability. Now, the actual presence of guilt can significantly affect the amount of fines and penalties charged.
The concept of guilt, which is characteristic of criminal law, has acquired specific features in tax law, so an absolute analogy does not apply here. However, while in criminal law these provisions have been broken down into ‘molecules’, in tax law they still trigger many questions. A taxpayer unfamiliar with the ‘theory of guilt’ may have the impression that the state is no longer interested in simply collecting taxes, but is rather focused on making a taxpayer feel guilty for violating the tax rules.
The lawyers usually pay closer attention to such changes as this requires the development of new approaches to building a defense position.
Tax audits: a new normal
Law 466-IX has revised some of the tax audit mechanisms by introducing a number of ‘surprises’ for taxpayers and expanding the list of powers granted to tax authorities. As some legislative provisions came into force in May, the upcoming taxpayer’s audits will be held in a new way.
For example, the tax authorities can now re-open the already reviewed periods for a repeated inspection after receiving information about taxpayer from their foreign counterparts. We have encountered such requests for information before, but now the legislator has provided the tax authorities with an improved tool for their application.
Tax authorities have the right to suspend tax audit of any taxpayer for up to 30 working days. However, the audits can be suspended for a longer period if there is a need to conduct an expert examination, obtain information from foreign authorities, renew documents or wait for a court decision. Previously, this rule applied to large taxpayers only.
When checking information related to employment, tax inspectors will be able to obtain explanations not only from officials, but also from any employees and ‘off-the-book’ employees.
The legislator also proposed a mechanism for auditing the permanent establishments of non-residents who have not been registered, and a mechanism for bringing non-residents to responsibility. If earlier such non-residents managed to stay below the radar of tax authorities, now they will have to bear responsibility.
A number of changes was also introduced to the appeal procedure. Now let's take a closer look at the current and upcoming changes.
Appeal procedure v.1.210
The audit findings report (a certificate, if you are lucky and no violations are found) is prepared within five working days from the date of the audit (10 working days – for taxpayers with branches or on the consolidated payment basis). A taxpayer has the right to file an objection to the audit findings report within 10 working days from the day that follows the date of receipt of the report.
Until 2021, objections will be considered according to an old and usual procedure. Starting from 2021, the objections will be considered within 10 working days by the standing commission of the regulatory authority responsible for consideration of objections and provision of explanations to the audit findings reports.
During the discussion of the above proposals with the committee, Oksana Markarova, a former Minister of Finance, expressed hope that the establishment of such commissions will prove to be a positive step that is aimed to reverse negative statistics of appeals against additional accruals at the stage of generating tax assessment notices (TANs). Our understanding is that the idea behind creating the commission was to have designated employees focused on dispute resolution and monitoring trends in the practice of the State Tax Service (STS) and courts. We will continue to monitor the situation to see how it works in practice.
From 2021, the commission, based on the results of the objections’ consideration, will prepare its opinion. If the opinion is not in favor of a taxpayer, Head of Tax Agency will be able to accept tax assessment notices (TANs) within five working days.
In addition, the legislator has introduced shorter deadlines for filing and considering of objections in cases when tax authorities initiate follow-up audits to review/clarify the results of the previous audits.
A taxpayer will be able to file a complaint to STS within 10 working days after the receipt of TAN. Such a complaint should be considered within the next 20 calendar days with a possibility of extension for a period not exceeding 60 calendar days.
Law 466-ІХ introduced the possibility of renewing the missed deadlines for challenging of TANs. This can be done within six months from the date of missing the deadline provided that a taxpayer has good reasons for missing deadlines. However, the legislator did not specify any criteria for determining validity of the reasons, leaving it to the sole discretion of STS. We can assume that this rule will be applied by analogy with the procedure for renewing time limits in court proceedings.
While the new tool allows the taxpayers to extend the time limit for administrative appeal, it is important to pay attention to the consistency status of pecuniary obligations. During the appeal, it is important not to allow the tax authorities to take actions on imposing the tax lien and recovering the debt. However, it is hard to tell what actions the tax authorities will take after the expiry of 10 working days allowed for filing of appeals.
If the decision is made against a taxpayer, he/she shall pay pecuniary obligations within 10 working days from the date of completion of the administrative appeal procedure. Alternatively, a taxpayer can initiate a mutual agreement procedure or challenge a TAN in court.
What about the responsibility of non-residents?
As mentioned earlier, the legislator has introduced a direct responsibility of non-residents for conducting business activities without registering a permanent establishment. For this purpose, the law has provided a mechanism for auditing such non-residents, including submission of the audit findings report and TAN.
The procedure for challenging such documents by non-residents remains general. Furthermore, a number of aspects, such as the submission deadlines or procedure for submitting documents that have to be translated and legalized have remained ‘behind the scenes’. Therefore, we will have to wait and see how things will actually work.
The implementation of mutual agreement procedure is one of the novelties brought into the national tax legislation. This is a special procedure for challenging additional tax accruals by taxpayers to whom double tax treaties apply. Under the mutual agreement procedure, tax authorities of the state that is a party to double tax treaties are engaged in the process of determining pecuniary obligations.
If a taxpayer believes that there are circumstances that indicate a ‘possibility of violating’ its rights arising from double tax treaty, he/she may initiate a mutual agreement procedure.
To do this, a taxpayer has to submit the respective application before or after the audit, or within 10 working days after the completion of administrative appeal procedure. STS should establish requirements to the application for mutual agreement.
The decision on whether to initiate a mutual agreement procedure is taken by the competent authority within 60 working days from the receipt of the application. In Ukraine, such a decision is usually taken by the Ministry of Finance, Minister of Finance or their authorized representative.
The procedure involves consultations between competent authorities of the two states on the application of the convention provisions. A taxpayer may also be engaged in such consultations. The results of consultations are then shared with a taxpayer and tax authorities.
One of important conditions is that the mutual agreement procedure cannot be performed simultaneously with the administrative or judicial appeal against TAN; although, a taxpayer can challenge in court the agreements reached under the mutual agreement procedure.
Everything comes at a price
If a taxpayer makes an application to the court for canceling a TAN, he/she will immediately face an issue of paying the court fees. Rules on how to calculate it are simple.
Canceling a TAN qualifies as a property recovery claim, therefore, the court fees for processing such requests in 2020 are as follows:
- for legal entities – 1.5% of the claims amount, but not less than UAH 2,102 and not more than UAH 21,020
- for individuals and private entrepreneurs – 1% of the claims amount, but not less than UAH 840.80 and not more than UAH 10,510
Challenging a TAN that reduced a negative value of a taxation object in court may be an exception. As such decision itself does not require a payment in funds, sometimes, courts consider it a non-pecuniary claim (for example, as the Supreme Court did in its ruling of 24 January 2020 in case No 826/13244/16). For a claim to cancel such TAN, a plaintiff must pay a court fee of UAH 2,102 (for legal entities and private entrepreneurs) or UAH 840.80 (for individuals).
If there are several claims, a court fee for property recovery claim is paid based on their total amount, whereas that for non-pecuniary claims is paid for each claim separately.
Timelines for court appeals
For a long time (since 2011) the court practice has been indicating that a taxpayer has the right to challenge a TAN within a three-year statute of limitations period for charging pecuniary obligations.
However, there have been some changes in the approach lately. The Supreme Court, in its ruling of 11 October 2019 in case No 640/20468/18, concluded that decisions made by regulatory authority not relating to charging pecuniary obligations of a taxpayer (subject to a prior administrative appeal) may be challenged in court:
- within three months from the date of rendering the decision following the administrative appeal
- within six months from the date of filing the compliant by a taxpayer, if the decision of the regulatory authority, following the consideration of the complaint, was not made or was not served on the taxpayer within the timeframes set
As for TANs, in its ruling of 3 April 2020 in case No 2540/2576/18, the Supreme Court referred to the same preliminary findings but noted that, for TANs, the deadline for the taxpayer to file a lawsuit is 1095 days and is calculated from the date of receipt by the taxpayer of the appealed notice.
Under all circumstances, we would advise businesses not to delay filing claims with the court and always take into account the consistency status of pecuniary obligations.
To allow admission or not to allow ...
Separate consideration should be given to allowing tax officials access to tax audits. For a long time, the law practice has been supporting the view that access of tax officials to audits eliminates legal consequences arising from procedural violations committed by regulatory authority when scheduling and performing respective on-site or physical audits. This means that if an audit procedure has already been started (even if the law was violated), its results could still be supported by the court.
Given the significant negative consequences of not allowing access to audits, the taxpayers mostly allowed such access, but recorded law violations in order to prove the illegality of conclusions made by tax authorities.
However, this practice has been undergoing some changes lately. Thus, the Supreme Court, in its ruling of 21 February 2020 in case No.826/17123/18, concluded: "Regardless of the decision made by a taxpayer on allowing/not allowing access of officials to audit ... a taxpayer can refer to violation of legislative requirements for audits by regulatory authority if a taxpayer considers that such violations result in illegality of tax assessment notices. In addition, the courts should, in the first place, give a legal assessment of the causes of action (if any) ...”
The Supreme Court immediately started to use this conclusion for substantiating of its decisions. However, the judges do not share the same position on this issue.
In its ruling of 28 April 2020 in case 815/94/16 and ruling of 28 May 2020 in case No.818/532/16, the Supreme Court stated: “The procedural violations committed by regulatory authority when scheduling and/or performing audits cannot be considered an unconditional evidence of illegality of tax assessment notices accepted based on the results of remote documentary audits. Such procedural violations shall be assessed to determine the extent to which they have affected the taxpayer's ability to protect its rights…”
In other words, the Supreme Court has taken two contradictory positions regarding the possibility of canceling TAN due to the procedural violations during the audits. Therefore, it is quite risky to rely on court practice in this case. However, the fact that the courts have started to pay more attention to the procedural violations by tax authorities is rather encouraging.
As we can see, the legislator has introduced a number of new provisions and slightly changed the appeal procedure rules.
It is high time for taxpayers to delve into the details of the new legislation, assess their transactions for the risk of additional tax accruals, train staff, and prepare additional evidential base to confidently defend their position during audits and appeal procedures.
On the other hand, the emergence of new institutions offers new opportunities for the protection of rights and interests. Therefore, lawyers should learn how to use them properly and effectively. And then the taxpayers will not have to feel pangs of guilt.